Mortgage Meltdown Isn't Just A Subprime Problem Anymore

The New York Times says that the mortgage meltdown isn’t just a subprime problem anymore, but has spread into the prime market where consumers with good credit are now struggling to pay their bills.

Plummeting home values are sticking home owners with properties that they refinanced with the intention of selling before their rates jumped. Now they’re trapped in homes they can’t afford and also can not sell for more than they owe.

Here’s an example from the Times:

An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition.

Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.

“The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”

The article also provides some troubling statistics about auto loans and HELOCs, both of which are seeing increasing amounts of loans in default.

It seems that the heady days of homeowners who were happy to pay huge monthly payments into their “investment” are over:

In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a “change in social attitudes toward default.”

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

Mortgage Crisis Spreads Past Subprime Loans [NYT]
(Photo:MeghannMarco)

Comments

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  1. dirk1965 says:

    There is no ‘meltdown’… do the math! This is nothing but media sensationalism. All this is is dumb ass people allowing themselves to live beyond their means. It’s also partially the fault of the mortgage companies for misleading people in believing they can afford the mortage. I’m so tired of this type of reporting!

  2. hi says:

    not according to this article:
    [articles.moneycentral.msn.com]

    btw: most those people who got those loans didn’t know better. The banks however did know better. These people are not living beyond their means. They didn’t know, and the banks didn’t tell them (except the small print)that their rates will go up so high they won’t be able to afford it. The banks know right of the bat how much that person can afford before giving them the loan. So it is the banks fault for giving loans to people who they know can’t afford it.

  3. jmvoytal says:

    @dirk1965: Your absolutely correct. There is no ‘meltdown’. For the media, the only news worth reporting to them is bad, sensational news. Good news doesn’t get anyone worked up. I wish they would look at the statistics. Foreclosures maybe up, but by barely a percent. Nothing worth writing home about.

  4. jmvoytal says:

    @hi: Come on, people need to take responsibility for themselves. Stop looking to blame someone else for something you decided to turn a blind eye too. A bank doesn’t know my budget, my priorities. They can’t tell me what i can or can’t afford. I DO! OH, and don’t look to Washington to solve your financial problems either. They haven’t been able to balance a budget in decades.

  5. superbureaucrat says:

    The banks are NOT to be blamed for this. I blame ignorant people that took out subprime loans without understanding the concept of an adjustable rate. However, I don’t see why banks made the loans if they had this in mind…

  6. kittenfoo says:

    i don’t think it is all media sensationalism. even those of us who are keeping up with our house payments are having a harder time paying the bills. groceries, gas, and home heating have all gone up faster than most people’s wages. there are probably millions of us who are making the payments, but definitely feeling the pinch, even if we don’t end up in bankruptcy.

  7. shoegazer says:

    @hi: WTF? The terrorists raised house prices? The terrorists failed to manage interest rates and prevent an asset bubble? That has GOT to be the most retarded article on the crisis I’ve EVER read. The fault of this lies squarely with government institutions who mismanaged the economy to the point where people thought it was OK to take out loans on houses that were 10x their annual income.

  8. hi says:

    Considering the FACT that banks do background checks and check to see if a person can afford a loan BEFORE approving a loan … how are they NOT responsible?

  9. MattO says:

    You know, i think the biggest part of the problem is the fact that so many people bought into an “investment”, and still look at it that way, rather than a place to live. I am 22 years old, and bought a condo with my fiance who is also 22, last April. Even at 22 years old (closed before our graduation date) – we were still able to get a 30 year fixed rate mortgage. I dont care what anyone says, if we can do it at starting salaries (not to mention the fact that we are paying over 300/month in condo fees, were required 250/month in PMI, and 300/month in property taxes), anyone can do it.

  10. weave says:

    My ARM just adjusted and went DOWN two percent (thanks oh reckless fed reserve). My mortgage was $800/mo and is now $650/mo. What kind of ARMs are these people getting?

  11. hi says:

    @shoegazer: yeah i know that article made me laugh…

  12. bustit22 says:

    I don’t have a lot of pity for someone who can’t afford the mortgage payments on a $740,000 home. Next time buy something you can actually afford.

  13. darkened says:

    @superbureaucrat: I agree with you on this. However I feel blame is not needed because the banks in seeking short term gains will have punished themselves far more in the end when they need to sell these homes that are mortgaged for double their value and they can only sell for a quarter of their real worth and take a loss of 80%+ of the home’s original sale/refinance.

  14. K-Bo says:

    @hi: The problem seems to be that they approve you can afford the house, not the house, a big screen tv for every room, a vacation every month ect. So few of the people I see with these problems can actually say they haven’t frivolously frittered away money that could be saving them from foreclosure right now. This is not to say everyone in trouble did this, or that no one should have a big screen tv, but there is only so much to go around, you have to prioritize.

  15. darkened says:

    @weave: If you’re paying $250/month for PMI you’re an idiot lol.

    For $250/month your mortgage insurance should be a full term product (not decreasing term) should cover you regardless if you sell your home or pay off your mortgage, cover you with disability income, provide you with over $500,000 if not $1,000,000 worth of coverage for you AND your spouse and then to top it off to return all of the premiums you ever paid into it after the 15, 30 years etc.

    And if you think I’m making this up if you can come to PA I’ll write you up the policy myself.

  16. tasselhoff76 says:

    Did anyone notice that this article does not appear to be talking about sub-prime loans but home loans in general?

    It may become the cost of doing business, to walk away from some investments. Corporations often do it when the cost of maintaining the investment exceeds its value.

  17. umbriago says:

    I was going to raise a lot of cash, too. “The whole plan” was for me to sit at a blackjack table and get an ace and a ten out of a deck of cards. I drew a 16. Now I’m caught.

  18. moore850 says:

    Would you take out a car loan that said, “we can adjust your payment up or down however we want”? No? Then why would you do that with a house that costs way more than a car?

  19. chiieddy says:

    @superbureaucrat and @dirk1965: It’s a bit of both.

    Problem: Banks gave out loans to people who should not of otherwise qualified.
    Reasoning: Banks’ fault

    Problem: People took out loans that were interest only and were surprised when their property values dropped and their principal was now more than the property was worth, so they’re stuck and can’t sell or refinance.
    Reasoning: People forgot to research.

    The main problem is people who were in these subprime loans aren’t dumb. They’re uneducated, often living on the edge. They were trying to live the American dream which includes “Life, Liberty and the pursuit of property” (Locke).

    Now, should they have read the fine print and had good lawyers who explained it all to them? Sure, in a perfect world.

    However, how can we not blame the banks who were making pure profit on interest only loans to begin with and were merely rubbing their hands together in the prospect of potential rate increases which would screw these people.

    Should the government bail people out? I think it depends. If they were absolutely mislead and can prove it, than yes, I believe people deserve to be helped out. If they just didn’t think their rates would ever go up (considering they’d just about bottomed out, where else could they go?), then no, they should live with the consequences of their actions. The banks, not at all. They brought this on themselves.

    The other, not often discussed, problem is the rebound this has on the rest of the real estate market and, ultimately, the economy at large.

    You now have a load of foreclosed homes on the market in addition to the homes ordinary people are trying to sell in the course of their everyday life (there were 3 notices in last week’s local paper alone for just my town). There are a lot less buyers out there, so people are stuck. Then people can’t move and the economy starts to stagnate.

    So, no, the media is maybe using shock tactics a bit, but there really is a big problem out there. Real estate is an early indicator of economic problems (as is new home construction).

  20. dirk1965 says:

    @hi: Then its their fault for not reading all the fine print. You are signing a contract… READ IT!

  21. Saboth says:

    I don’t feel sympathy for people that attempt to “flip that house”. There are always risks involved, and you bought that house with intent to make a huge profit, when there could have been an eldery couple or young married couple with kids that could have put it to use “as is”.

    Homes shouldn’t be counted on as “an investment”.

  22. I don’t want to be condescending to people who are in distress, but really, they have to shoulder some of the blame. Think about this. A house is the biggest thing you are ever likely to own, unless you are a billionaire and buy a small country or something. As such, you might want to invest a proportionate amount of time in researching all the terms and traps, that you would on a purchase of a car or a college education. And by proportionate, I mean, like this:
    Car costs $25K.
    House costs $250K.
    If you would spend 10 hours in researching your car purchase and your financing options, why wouldn’t you want to spend at least 100 hours on learning everything you need to know about buying a house.
    Consumers are at fault. Banks are at fault for not explaining this shit to people in ways they can understand it. There is a large amount of unnecessary jargon that goes into mortgages with the seeming sole purpose of confusing the customer. It’s as bad as medical insurance.
    Lastly, I blame the financial media. They have perpetuated this myth that home ownership is ALWAYS financially responsible when anyone who does the math can see that it doesn’t make sense for a lot of people a lot of the time. Especially considering the fungibility of homes, relative to other investments and savings vehicles. If you don’t understand fungibility, there’s always [google.com]

  23. descend says:

    This story is really infuriating. Rather than let his daughter take out some loans, he equity-strips beyond his means and will just declare bankruptcy.

  24. dirk1965 says:

    @chiieddy: You stated that “there is a load of foreclosed homes”. I would have to disagree with you. The final 2007 statistics show that less than 1% of homes were in some stage of forclosure. I would call that “a load”.

  25. B says:

    I wonder if any body’s paying attention to the actual article. This isn’t about subprime or interest only mortgages. It’s about people who refinanced their houses, and now that the housing prices are falling, they’re stuck with mortgages worth more than the price of their home. They knew they would need to refinance again in order to avoid the ARM increases, but they can’t because their house has devalued. You could blame them for not knowing the market would crash, but the housing experts were predicting that home prices would increase forever. It’s just like the Dot-com bubble burst, but because of the importance of housing, the effect on the economy is much worse. We should stop worrying about whose to blame and who should be punished for their mistakes, and concentrate on what can be done to save the economy.

  26. Instigator says:

    Have consumers now gotten the idea that their home isn’t an ATM?

  27. dirk1965 says:

    @dirk1965: Correction… I WOULDNT call that “a load”.

  28. balthisar says:

    Actually, it’s fair to blame the losers that causes the subprime crisis in the first place. I’m probably upside down in my house (prime, 30 year, fixed mortgage) because of depreciation, not my own reckless spending habits. It was bought as a home, not a flipper, and I still plan to be in it for many years. Hence, I’m not worried that I’m probably upside down, but it makes capital improvements that much more difficult. It means either (a) having the cash on hand (always the best option anyway), or (b) losing tax deductions in taking an ordinary loan. Option (c) is no longer available, that is, using your own house to fund its own improvements. By capital improvements, I don’t mean a 72″ television screen, but say a new roof, a sun room, big stuff. The depreciation is directly attributable to all of the losers that have provoked foreclosures and drive down the prices. We normal people had nothing to do with creating the problem, but as the article shows, their irresponsibility is affecting those of us that manage money wisely.

  29. hi says:

    @dirk1965: Read CHIIEDDY & POTKETTLEBLACK’s comments. They explain it better than I.

    -POTKETTLEBLACK
    “There is a large amount of unnecessary jargon that goes into mortgages with the seeming sole purpose of confusing the customer. “

  30. K-Bo says:

    @dirk1965: is that 1% of all homes? Because 1 in 100 of all homes is a load. Even if it’s of homes currently for sale, it certainly doesn’t seem like a low number.

  31. yesteryear says:

    i tend to err on the side of ‘people should deal with their own
    problems’, but with this particular problem, it appears that everyone
    who was involved in the process is actually to blame:
    -sleazy real estate agents who helped anyone who wanted one to get a loan
    -mortgage companies & appraisers who told folks their homes were
    worth more (didn’t mention the fact that the bubble would pop) and
    encouraged them to refinance
    -banks trying to cash in on skyrocketing home values, and “looking the
    other way” when a credit score was less than stellar (sometimes not
    even requiring proof of income)
    -uneducated home buyers
    -local governments also cashing in on increasing property values
    through increased property tax rates (which are assessed each year)
    and finally….
    what about the developers who built tons and tons of hideous and
    generic tract homes in “hot” areas like California, Nevada and Florida?
    is it a coincidence that these are the top 3 foreclosure states? most
    of those homes were purchased as investments.

    everyone is to blame. and now that my chances to buy a home are even
    slimmer because the standards have become incredibly high, and the
    economy is slipping into recession because of shit i didnt even
    participate in – YES the government needs to step in and fix things.
    this isnt the time to teach anyone a lesson. its more dire than that.
    wait until next year when your city has to face deep budget cuts adn
    the library and parks and shelters are closed… this is bad for
    everyone.

  32. weave says:

    @darkened: Er, I didn’t say anything about PMI. I don’t even have a PMI. Whatcha smoking?!

  33. sagis says:

    I’m sorry, the only one to blame here is that engineer who took a high risk bet. If you’re gonna try to live beyond your means, don’t complain about it later. Nothing to do with sub prime mortgages or anything related to it.

  34. dirk1965 says:

    @yesteryear: You only mention local government (which I agree with you about property taxes). But why should the federal government (aka ME!) have to bail out these people that made a bad investment? Of course, thats assuming you meant ‘bailout’… but you did say ‘fix’ which could mean something else.

  35. arch05 says:

    @yesteryear: “sleazy real estate agents” ding ding ding! scum of the earth backstabbers.

  36. jscott73 says:

    I know “who to blame” is debated with every housing article posted but I am a little surprised that no has mentioned the Realtors and their National Association. These are the salespeople. They feed stories/statistics to the media that make it appear as if owning your home is an obvious choice no matter what. They upsale properties then try to find a lender willing to give their client the money, so they can make their nice little profit. Even a buyer’s agent is compensated on price, so even your so-called representative is looking to sale you more house at a higher price. But they develop relationships and people trust them and do what they are told. Even now they are running ads telling peple now is a great time to buy. They are the salespeople converting peoples dreams into commission, then walking away without a thought as to what happens to those people next.

  37. missbheave (is not convinced) says:

    @B: I feel bad for them because this is a terrible financial situation for any family, but these people borrowed money to pay for things they couldn’t afford, gambling on the fact that their house would rise in value. If this guy had borrowed money and lost it all on the stock market, no one would allow him to shirk responsibility so completely.

  38. Me - now with more humidity says:

    DESCEND: And why do you care? His actions didn’t hurt you. And he’ll have to face his own consequences. It will have no impact on your daily existence.

  39. DashTheHand says:

    @K-Bo: 1 in 100 is the same as saying 1%. Grade school math?

  40. K-Bo says:

    @DashTheHand: I know, that’s what I pointed out, my question was 100 houses or 100 houses that are for sale. Makes a huge difference in the total number of foreclosures.

  41. jimmy37 says:

    The NYT article states “As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages.” I keep seeing this mentioned elsewhere and it makes no sense to me. How can people keep refinancing their mortgages upward, pulling cash out, and still afford the payments? And if they were to sell later on, where would they live? Some place cheaper? In both cases, it seems these people were doing nothing more than gambling with mortgage rate and housing price futures – and they lost. Except, instead of just losing their investment, they’ll end up losing their house.

    They gambled and lost. Why should they get special treatment? Will there be an equity sharing program for ARM loans in the future?

  42. SuperJdynamite says:

    @superbureaucrat: “However, I don’t see why banks made the loans if they had this in mind…”

    There was an interesting article posted to Consumerist a few weeks ago which apparently nobody read. It was labeled as an interview with a hedge fund manager but it went into the root causes of the “subprime meltdown”. Give it a read and you can see that these loans were pushed on banks as well…

  43. SuperJdynamite says:

    @jscott73: “Even now they are running ads telling peple now is a great time to buy.”

    It isn’t? I bought a house recently and unlike the insane market of a few years ago I had time to look at houses and do research. A few years ago you had to put in a bid within fifteen seconds of seeing a house on paper or else somebody else was going to get it.

  44. @PotKettleBlack: Yes I remember those little whispering articles a few years ago that said it may be better to rent, than buy at the peak of a market value. I’m glad I listened to those articles.

  45. peepytweep says:

    One word sums up this whole thing in its entirety : GREED

  46. @arch05: seriously!!! Everytime I see one of those “Buy me” shows on HGTV, I just feel nauseous realizing that the real estate agent is driving a hummer and pumps up house values to keep up that lifestyle.

    I really hope they’re the ones that really get a swift kick in the pants during the recession.

  47. failurate says:

    @weave: Not to speak for him, but I think his comment was meant to be directed at @MattO who is paying a nutty $250 worth of PMI per month.

  48. SuperJdynamite says:

    @hi: “Considering the FACT that banks do background checks and check to see if a person can afford a loan BEFORE approving a loan … how are they NOT responsible?”

    A bank is there to loan you money, not guarantee your financial future. That’s your job.

    The bank will see if you could realistically make payments under the conditions that exist when they give you the loan. Home loans typically have 30 year terms. The bank can’t possibly know what’s going to happen with interest rates, your home’s value, your spending habits, and your income over the next 30 years. Once they give you the loan it’s up to YOU to figure out how to pay it back.

  49. Mr. Gunn says:

    The current administration knew the bubble was coming, two years ago. They thought they could ride it out and let the next candidate take the fall, but they couldn’t.

    BTW, Ben, it’s been beyond subprime for some months now.

  50. cmdr.sass says:

    In an election year, everything is a crisis.

  51. failurate says:

    I love the folks that keep saying this isn’t real, that we are just imagining this.

  52. Jaysyn was banned for: http://consumerist.com/5032912/the-subprime-meltdown-will-be-nothing-compared-to-the-prime-meltdown#c7042646 says:

    @dirk1965:

    Link please.

  53. AD8BC says:

    A house is an investment (and remember, investments don’t always go up, past performance is not indicitave of futre returns, etc).

    But it must be treated as an investment to truly an investment. It should not be treated as an ATM.

    That’s not to say that all home equity loans are bad. If you are in a stable market, and have 50% equity on your home, maybe taking out $10-$15K to remodel your kitchen (like re-investing your dividends) isn’t a bad idea. Taking out equity to pay for college, is. College is overpriced anyway.

    I bought a home in Michigan in 2001 for $140K. I took a relocation last year and managed to sell it for $143K. Pretty bad returns. But I put 10% down when I bought it, and came out with about 30% (of the original amount) when I sold it. Sure, I paid some interest… but if you compare all of what I paid on it in interest, took away my profits, and compared it to paying rent for a similar size roof over my head, I came out pretty good vs. renting.

    When you consider where to live, and decide to live in California, you need to consider the housing market our there before you decide to “invest” in a home.

  54. clevershark says:

    People made a bet and lost. I have no patience for people who bought into the whole “houses as investment” scheme. They were adults when they made the decision to get into that racket, and they’re directly responsible for the fact that normal working families can’t afford to buy houses to live in anymore without getting into ridiculous amounts of debt. So, tough. These people fancy themselves investors when in fact all they did was buy high and are stuck with investments they can’t sell.

    Not that I feel sorry for the banks either. Both the banks and the now-troubled buyers were driven by greed, and it’s that drive that’s biting them hard now.

  55. anidealworld says:

    I don’t know how on earth anyone thought that housing prices would just keep going up the way they were… seriously. The whole market had been poised to crash- and it did and is.

  56. bigduke says:

    The problem is Greed and no accountability. Home loans get resold numerous times these days. The person or bank that qualified you for that loan and got it for you turned around the next day and sold that paper to another company and got paid. They made their money and are gone. You owe money to someone who never did any due dilligence on your ability to pay it back. The owner saw dollar signs because of the housing bubble, the brokers and banks saw dollar signs on their fat commision checks. EVERYONE had their hand in the pot for this mess. To try to single out banks or individuals as the true bad guy in this mess is just silly. An unregulated market was replete with theifs. Some people fell for it and got burned, some people joined in and made a profit. As usual the commenters on the The Consumerist think they are smarter then everyone.

    Somehow we have forgotten the old country adage of “pigs get fat, hogs get slaughtered” This country needs more bacon!

  57. kimsama says:

    @hi: Are you brand-new to this earth? Banks stopped caring about clients’ ability to repay loans when they started to be able to turn around and sell those loans as mortgage-backed securities to any number of firms. All of those firms were in a feeding frenzy over the last few years, which led banks to jump on board as hard and fast as they could to make money while the money was there to be made.

    What’s to blame is lax regulation of this whole process, and yes, lax oversight of NINJA loans and income-onlies.

    But if you seriously think the bank is going to do due diligence in this regulatory climate, you’ve got another thing coming. It’s better to evaluate your ability to pay for a house the old-fashioned way (by doing a budget and figuring percentage of income) than by going with how much of a mortgage you’re approved for.

    P.S. The guy in the story above makes me fear for our national security. 6-figure job at LM and he hadn’t saved any money for his daughter’s education? These are the type of people working on defense?! My parents put 3 kids through school with savings, and they didn’t make 6 figs combined. (And own their house free and clear, don’t have debt, don’t live beyond their means, etc). Man, I hate, like, everyone now.

  58. sburnap42 says:

    Two rules: 1) don’t ask if you can afford to make the current payment, Ask if you can afford to make the payment on the loan when the rates go up as high as they can go. 2) Leave equity in your house.

    Follow those two rules, and you won’t end up like this guy. Hell, follow just one of those two rules and you won’t end up like this guy.

    They used to insist on 20% down when you bought a house. Part of the reason for this is that it is a cushion for if and when the housing price drops. People seem to have forgotten this and see no risk at owing $740k on a house worth $740k.

  59. gingerCE says:

    @hi: Banks had to deal with the middleman–the mortgage broker or financier–they were the ones who put the deal together and found the financing from the banks–the middleman (woman) was the one who put the “fraudulent” paper work together and often inflated applicant’s income. Some brokers did offer their own financing but would immediately sell the loan to a bank–but the loan was already a done deal.

    What used to be when you wanted a home loan you’d go to your local bank/credit union to apply inside for a loan. What happened was people went to an independent broker or small company who then would “shop” around the loan to all of the banks (hence, better for the consumer right? ha!) to get the best deal. These brokers knew to qualify for a bank loan that some applicants(not all) but enough needed to pad their incomes.

    I know cause I know someone who went through the “stated income” home loan first hand. It’s not just stated income, you have to show you have X amount in the bank (usually 3-5 times the mortgage payment). In my friend’s case, he had to show he had around 10K in the bank (3x’s his mortgage payment). Well, he only had 5K so he “borrowed” 5K from a family member. Easy.

  60. enm4r says:

    “The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”

    That’s a sorry excuse for a plan, and I don’t know why anyone would have sympathy for someone in this situation. Neglecting the obvious cases of fraud and deception there are going to be many prime mortgage defaults coming up when people weigh the cost of draining their entire savings vs defaulting. Right now I’m sure there are many just staying afloat while watching their savings deteriorate who will eventually hit bottom in the next 3,6,9 months. This has nothing to do with predatory lending, it has to do with greed and shortsightedness.

  61. friendlynerd says:

    How, after all this sub-prime crisis and flap, do websites still have those shitty ads with an animated, dancing slut or a stoned alien telling you to refinance your $300k house for $965 a month?

  62. Flibbetigibbet says:

    Anybody who works for Lockheed below the executive level and took out a mortgage on a $750K home is living beyond their means. Period, dot.

  63. deadlizard says:

    Don Doyle from Lockheed Martin is an idiot. I guess he never heard
    of Federal loans, grants and private student loans to put his daughter
    through college. Or maybe it was easier to use his home equity as an
    ATM. This article pisses me off.

  64. Snarkysnake says:

    @clevershark:

    “People made a bet and lost”

    I would respectfully disagree with you. The lenders made a bet and lost.They drank the “prices will just keep on rising” Kool-Aid just as much as the borrowers did. They basically sold the no equity, 100% (and more) financing buyers an option. The option guaranteed that if the house did keep going up in value , the “buyer” could refinance their way out of the bad loan product that the lender sold them. The lender got his money back and collected the fees from writing and packaging the loan.As long as their was enough liquidity in the system to keep robbing Peter to tighten up Paul,everybody was happy.

    The other side of that option is what we have now- the collateral isn’t worth the loan value and some buyers are making the perfectly rational decision to mail the kays back to the lender because they can’t make the higher payment when the loan resets. (I didn’t say moral -that’s another argument)They have no equity in the home,so the decision is easy.The lenders didn’t price that option correctly to take into account a lot of risks and now they’re boned in the ear and as you may have noticed,they are raising fees and charges left and right on people that can pay them on their other services. This is a tax that we all seem to be paying for the whole sorry mess…

  65. yesteryear says:

    @dirk1965: ok, so everyone agrees that these people were greedy and basically got what they deserved – that much is clear. but why is everyone against the government doing something about it?

    2/3 of our economy is consumer spending. because the average person’s largest investment has lost a huge chunk of value, and they can no longer justify spending $250 a week on crap at Target, now everyone (even you and me, the ones who weren’t greedy, and didn’t make a stupid investment) are feeling the affects. inflation is rising fast, credit is not as easy to get, and home loans are even more difficult to qualify for as a first time homebuyer.

    so no, i don’t think the government should bail out the homeowners. but i don’t think they ever intended to write off the loans completely. what they have proposed so far (freezing rates for 30 days)seems to be a good start.

    unless you have money invested in the banks who are losing out on the frozen interest rates, or you love seeing families who live in their cars, there really doesn’t seem to be a downside to helping homeowners.

  66. cmdr.sass says:

    @yesteryear: The downside is that those who are responsible and live within their means will end up footing the bill while those who are living it up get another free pass.

  67. Dawnrazor says:

    I too am growing very weary of all this reporting. It seems obvious to me that the responsibility falls BOTH with lenders AND consumers. The bottom line is GREED, and a major problem was/is the thinking that values will continue to escalate. Stupid me, I always thought of my home first and foremost as a place to LIVE, not an income-generator. I’m just having a lot of difficulty mustering any sympathy because the bottom line is that these consumers got themselves into trouble biting off more than they could chew.

    I don’t care that the mortgage brokers/realtors/banks are cheats and liars-this should be obvious to anyone with just a modicum of common sense and is no excuse-the responsibility for one’s financial well-being lies solely with the INDIVIDUAL. We bought in 2004; were approved for TWICE what we actually financed-we knew the difference between what we could actually afford vs. what we were offered and made the RESPONSIBLE choice. Sure, it would have been nice to have gotten “more” house, but the peace of mind knowing that our ownership is secure far outweighs the benefits of a bigger/fancier house, and having a good amount of disposable income is great too. All these people I’m reading about in these alarmist news stories COULD have made the same decision I did, and possibly would not be in trouble now. I have no sympathy-people need to start taking ownership of their lives and well-being (financial and otherwise) and deal with the consequences of their own bad decisions (regardless of how unpleasant)-it should be noted (lest anyone think I am just an insensitive prick) that I lucked out with the home but have had to bear the consequences of my own stupidity many times in my own life-yeah, it WAS harder than hell and felt hopeless at times, but I always persevered and emerged better than ever from each “crisis”, and no one bailed me out.

    Why should I be required (via governmnet intervention) to bail out those who are irresponsible/lack financial savvy when their distress is a result of nothing more than their own bad decisions (regardless of motivation). I made GOOD decisions and am reaping the rewards-if you made BAD decisions: screw you, you are on your own-its not my duty to sacrifice my prosperity (EARNED via hard work, smart decisions, and learning from stupid decisions) to bail you out of your self-generated misery-learn a lesson and do better next time. There is just a shocking level of functional illiteracy in the US when it comes to financial matters, but that’s not the problem of those who ARE literate (the vast majority of homeowners).

  68. yesteryear says:

    @cmdr.sass: newsflash: we already are footing the bill whether we like it or not. as i mentioned, inflation is rising and so are credit card rates, even for folks who are paying on time. i’m not saying i’m happy about this, but i’m not OK with enduring “the greater depression” either.

    i don’t think banks should be bailed out, but families being thrown out of their homes – yes, they should be given assistance.

    people need to step back and think about the larger issues here. when city coffers dry up you’ll start seeing more and more pot holes, and shorter hours at the library, and no more summer recreation programs for your kiddies — there is a chain reaction to foreclosure and something has to be done.

  69. Techguy1138 says:

    Banks are there to make money. They failed.

    You don’t lend money large sums of money without doing research into the person borrowing it. Even then you try and secure the sum to an asset.

    Banks gave away large sums of money to people without checking. Business should sometimes fail. If a bank loaned out to much money and the collateral is now worthless they should go out of business.

    The government should not subsidize business failure. Banks were stupid and should suffer. The country will take a hit but would recover in time.

    If the government wanted to do something 5 years ago was the time.

  70. timsgm1418 says:

    My problem is that our stupid governor raised property taxes (as well as sales tax) and since I bought my house 16 months ago the monthly payment has gone up almost $200. It is a fixed rate, the increase is due to the damned property taxes. The payment was affordable when I bought it, but with everything going up I’m having a difficult time of it. I bought a house I could afford, my government took it out of my price range after I bought it, by more than doubling my property taxes

  71. mthrndr says:

    @friendlynerd: Yes, I wonder about those too. How much crack does someone need to smoke to believe that you can get a 500k mortgage for 4.5% / $800 / month and think that it’s a valid offer?

  72. FightOnTrojans says:

    @deadlizard: Exactly what I was thinking. I used to be a financial aid counselor at a major(ly expensive) university (ahemFightOn!ahem), and one of the questions we routinely heard was whether it was better to refi/tap into the equity of a home rather than take the Stafford/Perkins/PLUS loans. At the time, some people could get a lower interest rate on those loans than they could on the school loans (or so they thought). My usual reply was that I couldn’t give them that kind of financial advice, only that if I were in that situation, I would be concerned about using my home as collateral. For example, in the unfortunate case I could no longer pay the loan back (job loss, incapacitation, death, etc.), if done with a refi/HELOC, they’ll take your house. If you have a student/parent loan (unsecured), you’ll have debt collectors hounding you, and you won’t be able to borrow again, but they won’t take your house. This guy is evidence that something “bad” doesn’t necessarily have to happen, and exemplifies exactly why you shouldn’t tap into the equity of your home for educational purposes. I bet he never talked with anyone at his daughter’s school’s financial aid office.

  73. Thorny says:

    When I was young I remember that a “starter house” was not a 4 bedroom / 3 bath McMansion in the burbs. Also, when I was young, I recall that interest rates were around 9% as well.

    So if you as a consumer can’t handle the 4th grade reading level required to read the mortgage contract and can’t do the 3rd grade math required to figure out how much a big interest rate jump is going to cost you in 3 years, then you should lose your house and go back to elementary school for a refresher.

    I am tired of people surrendering their personal responsibility and then whining about the consequences. Just because a loan is available to you doesn’t mean you have to sign on the dotted line.

  74. cerbie says:

    But borrowers like Mr. Doyle, the engineer in Northern California, say they are victims of their circumstances – housing prices collapsed and lending standards tightened just as they needed to sell or refinance.

    No. If you couldn’t work anymore, or you had to take a pay cut, or had to relocate, or some other thing like that, he would be a victim of circumstance. He is not a victim of anything.
     
    He was intelligent, informed, and decided to gamble. Does that higher market value mean anything if you aren’t selling? Not really. That money that can borrowed out of it doesn’t just *poof* into existence (that’s the Fed’s job). They expect to make what you get out back at a profit.
     
    $740k from $275k?! I hope their daughter learns from all this.

    Still, Mr. Doyle does not regret refinancing in 2004.

    Gotta love denial. Wouldn’t they have all had more money and better credit by now if they had gotten the house fixed, or refinanced it to fixed, and left it well enough alone at a lower value? Or, like, let her go to a cheaper college.
     
    Ms. Harris appears to have sense, but be stuck. If the article is portraying her remotely accurately, she seems like the kind of borrower they’ll really want to work with. Mr. Doyle, OTOH, dug himself into a hole, knowing he had a finite but unpredictable window to get climb out, and didn’t. Boo hoo.

  75. gingerCE says:

    @deadlizard: I agree, he bought his home for 250K in 1995–now the loan is 740K. What did he do with nearly 500K? College is expensive, but it’s not that expensive. Plus, he only mentions paying college for 1 child.

    Oh, he said that he invested the money in businesses that went bankrupt. Huh?

  76. naptownman says:

    The mortgage itself is only half of the problem. What about bonds that are underwritten and backed by those mortgages? This was illegal after the Great Depression but recently made legal again. All of those bonds are now underfunded because the property isn’t worth anything near what it was at the time the bonds were sold.

    Pity Poor Joe who didn’t know the bond fund he put his 401K into is also tanked and he never came near a sub-prime mortgage or lived beyond his means. This is real and it sucks.

  77. rioja951 - Why, oh why must I be assigned to the vehicle maintenance when my specialty is demolitions? says:

    I just finished paying for my first home, so I’m not really concerned with foreclosure issues. What I’m afraid is that the Japanese had this same problem almost 15 years ago, and they are just breaking even today.

    The worst part is that the gov is doing the exact same thing the japanese did, and they had a 10 year problem. Just to be sure I changed about a third of my investments out of the country and into Euro. Heres to hope this doesnt come bite me in the ass tomorrow.

  78. glomm says:

    Best part comes at the end:

    “Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.”

  79. whydidnt says:

    @hi: Except it isn’t just in the fine print. Mortgage Lenders have been required to provide a separate notice regarding Variable Rate Loans for several years now. The notice includes an example of what could happen to payments if the rate goes up during the term, and also includes a chart showing what the rate has done historically, and how that would affect payments. The borrower has to sign this form at closing. It’s not in fine print anywhere. It’s in plain black and white! Anyone complaining that “they didn’t know” when signing for a Variable Rate loan is either too lazy to read the documents they sign, or illiterate.

    In either case it doesn’t help the situation when people automatically come to their defense and blame the bank when this happens. It just empowers those folks to continue to make bad decisions, since it’s “not their fault” anyway. Banks are already being punished significantly, in the form of financial losses, for their poor lending decisions. There’s no reason to pile on and blame them for the consumers poor choices too.

  80. whydidnt says:

    @rioja951: None of us want to see this stretch out over a 10-15 year period. What would you suggest the government should do to change the situation? I personally don’t think that in the semi-free market society we live in there is much they can do. It would be interesting to hear suggestions though on steps they could take to accelerate this.

  81. shadow735 says:

    @hi: That is bull crap, the reason these people didnt know better is because they didnt act like adults and read the loan docs make sure they understand them and review their own finances to make sure they could afford the max interest that the loan could be at.
    I guess you have never heard about financial responsibility. Its not the banks job to budget the borrowers finances. The borrower is fully at fault for signing at the dotted line without doing the research that needs to be done.
    Sorry man but buying a house isn’t like picking up a burger at a fast food joint but that is how people treated it.
    They didn’t know they couldn’t afford it that is the biggest crock of crap I ever heard.
    Come one people live your own lives, read the crap you are signing.

    HI your mentality of the banks are at fault is the same mentality of explaining to a police officer that stealing that candy bar wasn’t your fault, it was the stores because they made it available.

    Maybe the loan officer should have read the loan docs to the borrowers after they tucked them into bed, would that be about how you think things should be?
    .
    .
    .
    “Considering the fact that banks do background checks and check to see if a person can afford a loan before approving a loan…how are they not responsible?”

    Have you heard of the term Undocumented income, not everyone works at a full time job. Some people are self employed and don’t get W-2, also people can lie have you heard of fraud? Besides that still doesn’t let people off the hook when it comes down to it its their own responsibility to make the right financial decision, not to just sign the docs without reading them
    Also the not understanding the docs crap is a load of shit too, if you cant understand the legal jargon hire an attny to explain it for you. Docs are Legal documents not cat in the hat books.
    If people cant afford an attny then they have no damn business getting a home loan.

  82. Anonymous says:

    Not everyone walks into an ARM blind. I was well aware of how it worked, but signing up for the 5/1, interest only option got me a much better rate because the banks were betting that rates would go up. So, I’ve made payments as if I had a 30 year fixed and reduced the principle. Still have two years to go before a reset but rates are actually down below my current mortgage. Maybe there’s a bit of luck to it too.

    An ARM can be a good tool if used properly but like every financial product, they’re not for everyone.

  83. qgriffith says:

    The meltdown is also hurting people who are trying to sell their homes. I had to relocate in order to find a new job. In doing so I put my house on the market, 10 months later it still has not sold. Because of the builders who have a surplus of new homes and can afford to sell them cheap, the lenders not giving anyone else loans, and the high amount of foreclosures, my house isn’t worth anything. I am having to price my house so low, I have to spend over $10,000 of my own money if and when it sales. My savings are gone, from paying both rent in the state I moved to, and my house payment, that I don’t even have enough money to sell my home. So not everyone in this situation is someone who got a loan on a house they couldn’t afford, there are some of us who are caught in the shrapnel.

  84. CompletionBackwards says:

    @darkened: PMI covers the lender, not the borrower. The borrower doesn’t choose it. It’s a requirement placed by the loan investor based on loan-to-value ratio.

  85. Anonymous says:

    @qgriffith: If the government wants to help people, it should be helping people in your situation not the banks and borrowers who acted irresponsibly.

  86. StarWhores says:

    Seems to be a lot of self righteous (self proclaimed fiscally responsible)asshats here that should consider some compassion towards others.
    If they ever find themselves in a position financially perhaps they can vote themselves off the island or just kill themselves. Make sure you have burial insurance though so we don’t get stuck footing the bill.
    It’s real. It’s happening. See it for what it is or keep your head buried in the sand.
    People who have financial problems run the gamut from deadbeats to those in the wrong place at the wrong time.
    In reality where can you find a house etc. that isn’t 10X your income? Probably not where I live and work.

  87. Canoehead says:

    The US is one of the very few countries where one can get a mortgage that is fixed rate for 30 years. Given the really low rates over the last few years, it has been an F’n gift to consumers – anyone who didn’t take advantage of this either has the liquidity to take a risk or is retarded. Sure the banks and brokers lent more than they should have, and as far as I am concerned their losses are well deserved, but the consumers were also glutoneous and unthinking. When I went to buy my place I spoke with a real bank and they told me how much I could borrow – I almost vommited onto my desk, there was no way that I wanted so much of my after-tax income going to my mortgage. I guess it was theoretically manageable, but it would have meand that almost all my savings was via my home. Bad idea to invest it all in one place.

    I have no doubt there are some real hard-luck stories out there, but I guess the NYT was too lazy to find one, because this so-called engineer clearly could not do grade 10 math. I guess he was also historically ignorant too, since NO boom/bubble has ever lasted forever – be it tulips, beaver pelts, railroads, tech stocks or real estate. Well, the last admin had the tech bust, and this one has the housing bust – seems like the public does not understand that what goes up will eventually come down, at least for a while.

  88. Quintus says:

    Someone correct me if I’m thinking wrong. But these banks are already making money on the mortgages they have given out to the people who are paying for their houses. And they’re bumping them all up to interest rates they can’t afford because of greed.

    1. The home owners are already paying for their houses.
    2. The banks are making money off them.

    So now the banks raise all their rates to amounts they can’t pay and:

    1. The homeowners can’t afford to pay their mortgages anymore and forclose.
    2. The banks take huge losses on the houses.

    The homeonwers are not homeowners anymore, the banks loose lots of money.

    Isn’t it more prudent for the banks to just stick to the low rates the homeowners are already paying, that way they don’t loose their houses, and at the same time the banks aren’t looseing tens of billions of dollars are deals that are going bad. True, they will make less money on lower interest rates, but they won’t be loosing money, and they still will be turning a profit.

    Doesn’t that make sense? Geez.

  89. shadow735 says:

    @Quintus: Banks are not “raising rates’, they are following the terms of the docs that the borrowers signed and agreed to, Docs specify the max interest rate that the mortgage can be raised to. Those interest rates are determined by the fed base interest plus what ever % is in the terms(I am not sure about this but the % raises are set to guidelines)

    You are correct that the homeowners cant afford the pmts and end up in foreclosure
    You are correct that the banks/investors take huge losses.
    A foreclosure can cost above $25k to complete, then when the property becomes REO there are cost associated with upkeep, utilities, winterization fees, taxes, insurance ect)

    QUINTUS so what you are proposing is that the Mortgage companies reward these irresponsible borrowers with a fixed intro rate that is below a prime rate for not being responsible enough to make sure they read the docs and could afford the increase pmts. After all they knew the loan was a ARM that would reset to a higher interest.

    What about the prime borrowers that are not late worked hard for their credit rating they basically get screwed.

    I am not against helping these people but not thru a bailout where tax $ is used. I am against a rate freeze for the life of the loan, a temp freeze for another two years is okay but for the sole purpose of either selling the prop or reefing into a fixed rate.

    You cant have no consequences for irresponsible financial decisions. People need to do their homework and work to get that house and make sure they have looked at all angles of cost and if they can afford it.

  90. Quintus says:

    I see where you’re coming from. I actually had a couple of friends trying to get me into the houseing market back in 2000-01 when the prices were high, and the lender was trying to get me to take a loan way above my salary rate. I stood back and thought, these prices are bloated, and I’m definitly not going to take on a loan I know I can’t afford, and I was not going to go into an adjustable loan, I wanted a fixed one. All in all I decided on my meger income that I make, and the houseing market prices, I couldn’t afford to buy one. And I was right, I’d probably be with a lot of others right now if I did. So yea, blame can be shared all the way around.

    But still, these are people. The banks won’t loose the money, and the people can keep the homes, it just makes sense to me. Besides this doesn’t affect the ones forecloseing and the banks only. It affects the neighbors, as eyesores can cause houseing values to decrease futher, and hurts the community.

    So looking at it and saying, ha, serves you right is just plain stupid, not to mention morally repugnant.

    Anyway this is just the start, people think they’re in a panic now, just wait, I’ve a feeling things are going to get a lot worse in time, maybe not immediatly, but it will happen.

  91. shadow735 says:

    We have a long way to go till the housing market recovers, home prices are still too high.
    I agree something needs to be done but not handouts, freezing the intro rate for a specified time period is a good thing but not for the life of the loan. No one will learn that way.
    That will only encourage people to make the same bad decisions because they will know that the govt will step in and rescue them.